The Incidence of Remittances in Latin America and Effects on Poverty and Inequality

Jonathan Loritz Master of Public Policy Candidate Maryland School of Public Policy International Security and Economic Policy May 2008

Abstract

This paper analyzes large household data sets from El Salvador and Bolivia to investigate

the incidence and effects of remittances on income. It finds that remittances to El

Salvador do indeed decrease both poverty and inequality. This is most likely the result of

geographic access for low-income households to the largest remittance source country in

the world, the United States, which as resulted in a significant and growing migrant

population. Conversely, in Bolivia remittances do not appear to have a significant effect

on poverty or inequality and are much smaller in magnitude.

Although no two countries are quite alike, El Salvador appears broadly representative of

remittances to Central America as a whole, which receives far more remittances relative

to population and income than South America, represented by the case of Bolivia. The

findings suggest that remittances may be a tool to reduce poverty and inequality in the

most unequal region of the world if efforts are focused on Central America and the

Caribbean. The United States, World Bank and Inter-American Development Bank can

leverage remittance flows for development by enhancing data collection, promoting

formal transactions mechanisms with lower costs, expanding financial access for both

migrants and remittance recipients.

Introduction

Remittances have become an increasingly important capital flow and source of income

for developing countries. Remittances are the earnings of migrants abroad that are sent to

family, friends and communities in their home country for extra income to increase

consumption and investment. Remittances are traditionally viewed as being a pro-poor

capital flow – that is to say, of disproportional benefit to low-income households.

This paper assesses the validity of that claim by analyzing the incidence of remittances in

El Salvador and Bolivia. It uses a case study approach to use geographic and historical

factors to explain the differences between these countries and draw implications for

policies to leverage remittance flows for development. Finally, policy recommendations

will be provided based upon literature and application of the findings.

Background

International remittance transfers are recurrent payments by migrant workers who

typically send money every month to their families in their home country. A World Bank

international task force on remittances has defined these as cross-border person-to-

person payment of relatively low value.1 These small transactions have come to the

attention of policymakers because in aggregate they can be quite large and have

implications for migration, development and macroeconomic stability. The G8 countries,

at their summit at Sea Island in June 2004, agreed to take action with developing

countries to increase the efficiency of the international remittance system.

1 CPSS/World Bank – Consultative report on remittances – March 2006.

Remittances have robustly increased over the past ten years with double-digit growth

between 2000 and 2006. The World Bank (2007a) estimates that total remittances flows

increased from USD600 billion in 2000 to USD1.6 trillion in 2007 – an increase of over

150 percent. Remittance flows have not only increased in magnitude since 2000 but have

become greater than official development assistance. They are also stable compared to

foreign direct investment and private debt and portfolio equity flows as shown in Figure 1.

Recorded remittance flows are

currently only a fraction of total

remittances, though the ratio has

been rising. The process of

sending money abroad has slowly

become more formalized, and

thus easier to measure, as

international financial flows have been more carefully inspected and transaction costs

have decreased. However, Freund and Spatafora (2005) estimate 30 to 75 percent of

remittances remain informal and hence unrecorded. Informal channels include cash

transfers based on personal relationships through business people, or carried out by

courier companies, friends, relatives or oneself. These transfers remain one of the greatest

challenges to remittance policy.

Remittances are also a global phenomenon. As international migrant stocks have

increased, so too have financial transactions. China, India and the Philippines currently

Figure 1. Capital Flows to Developing Countries

Source: Ratha (2007)

receive the greatest amount of remittances by value, primarily due to their large migrant

populations. Yet as a share of GDP, smaller countries such as Haiti, Honduras and Jordan

receive the most (World Bank 2006a).

The United States, Saudi Arabia and Germany are the three greatest sources of

remittances. The United States is the source for 30 percent of global remittances, more

than any other country, and Latin America receives 75 percent of all its remittances from

the U.S., according to estimates by the World Bank (Ratha 2007a). But it also important

to recognize that about 81 percent of remittances to Latin America from the U.S. goes to

countries in Central America and the Caribbean.

This trend towards greater remittances is expected to continue. While economic

downturns may slow the growth of remittances, globalization’s effect on international

migration and the international financial system is, and will continue to be, a powerful

force. Continued global inequality and frequent instability suggests that migration will

persist and remittances grow, further integrating the international financial system.

Migrants’ host countries will need to deal with the consequences of these global forces

and many are engaged in studying remittances to better understand their causes and

effects.

Migrants send remittances for a variety of reasons that are discussed by Solimano (2003).

One motivation, altruism, reasons that migrants send remittances to improve the well-

being of their families and communities in their native country. Conversely, the self-

interest motivation suggests that migrants view their home country as an obvious place to

invest for higher rates of return and to secure an inheritance.

Two other motivations take the family rather than the individual as the unit of analysis.

The implicit family contract theory proposes that families finance the costs of migration

as a form of an investment or loan. In this scenario the migrant generates a higher yield

abroad, in the form of remittances, improving overall family income. Finally, the co-

insurance incentive to migrate explains that migration helps families diversify their

economic risks by providing support during economic downturns or periods of instability.

Migrants and their families are likely motivated by at least one, and possibly many, of

these theories about migration and remittances.

The extra income received by households is used for consumption and investment to

improve the quality of life. There is some concern that additional income may be used for

luxury goods or cigarettes and alcohol but generally the increased consumption

expenditures help families to eat better and access healthcare (source). A study of

remittances to Ecuador shows that about 60 percent is spent on food, medicine, house

rents and other basic commodities (Solimano 2003).

One of the most important development goals in Latin America is to leverage marginal

income for saving and investment that enhances education and infrastructure for long-

term growth (IMF source?). In a draft working paper Adams (2005) found that

households in Guatemala that received remittances actually spent less at the margin on

consumption, more on investment goods like health and housing, and 58 percent more on

education. Similarly, Airola (2007) explored Mexico’s biannual national household

survey to examine the effect of remittance income on spending categories. He found that,

on average, households with remittance income spent significantly less on food

(including tobacco) but more on durables, health and housing than households without

remittance receipts. But how do families actually obtain the money that their migrant

family member has earned abroad?

Remittance Corridors

The financial system connecting home and host countries is often referred to as a

remittance corridor. Some of the busiest include U.S. – Mexico, U.S. – Philippines and

United Arab Emirates – India. Within each of these corridors there are a number of

stakeholders including not only the senders and receivers but banks, money operators,

central banks, development agencies and more. Corridor efficiency is a critical element

when seeking to improve the benefits of remittances for the poor.

On the sending side, remittance corridors between the U.S and Latin America are

frequently dominated by only a couple of money operators such as Western Union or

King Express (source). In the receiving country, local unregulated institutions are

sometimes the leading receivers of remittance flows, as is the case in Guatemala. In that

country, more than 50 percent of remittance flows go to rural areas where financial

access is low. Until recently many financial intermediaries were engaging in exclusive

bilateral agreements creating a major barrier to entry for new money operators in the U.S.

This corridor was once characterized by informal cash couriers but the dominant

remittance mechanism has gradually shifted to formal electronic transfers, largely as a

result of new anti-money laundering and combating the financing of terrorism

(AML/CFT) measures: the Patriot Act regulates bulk cash transportation into and out of

the U.S. with a maximum of $1,000 (cite). Yet as of 2004, only 10 percent of remittance

flows to Guatemala were sent through U.S. banks (source).

The average remittance to Latin America is under $300 (most recent WB source), sent an

average of once per month. However, transactions fees can run as high as 20 percent of

the value of the transaction, severely inhibiting flows or pushing transactions into the

informal sector. Today the fee for sending $200 from the Maryland in the United States

to El Salvador or Bolivia through Western Union is $27, or 13.5 percent.2 Yet overall

transactions costs have been falling Latin America, but unevenly, and the most for

Mexico, El Salvador and Bolivia (Orozco 2004).

2 Author’s calculation, Western Union

Figure 2. Average Cost to Send Average Remittance Amount from U.S. to Home Country

Source: Orozco (2004)

How Pro-Poor?

Experts sometimes claim that remittances offer the prospect of pro-poor financing for

development (cite). Indeed, migrants willing to work in service or construction

employment at lower wages than natives are presumably from lower– and middle–class

households in their home countries so that their remittances should be expected to

decrease inequality and poverty. Yet, the aggregate incidence is often more complex. The

World Bank (2006a) admits that,”remittances sometimes go disproportionately to better-

off households and so widen disparities.”

Looking particularly at India, China and the United States, there is evidence that many

migrants are not poor. Many of these countries’ best and brightest come to the United

States to study or on H-1B visas.3 These migrants may be more likely to come from

wealthier families and have more earning power with their higher education levels. On

the other hand, many of the rich who migrate eventually bring their families with them.

And so it would seem that a series of factors determine the degree to which remittance

flows are pro-poor.

Migration Patterns

El Salvador was chosen as the

first country for analysis in this

paper because it has one of the

most stable remittance flows in

the world (Ross 2007) that

contributes about 16 percent to

gross domestic product (GDP)

and makes remittances likely to have a significant effect on poverty and inequality. El

Salvador’s high levels of remittance receipts appear to reflect its geographic proximity to

the U.S. and the prevalence of networks of earlier migrants.

3 The H1B Visa is a United States nonimmigrant visa that allows a U.S. company to employ a foreign individual for up to six years and may lead to a Green Card. The purpose of the H-1B visa is to give U.S. employers the opportunity to hire foreign professionals if a U.S. citizen or resident is not available. In order for the H-1B visa to be issued, the job offer must be in a specialty occupation such as architecture, engineering, mathematics, etc.; No U.S. citizen or resident must be available for the job; and the petition must be submitted by the company (not the employee). The employee must have a bachelor degree, specialized skill and be able to read and speak English.

Figure 3. Remittance Growth

Remittances Have Increased as a Share of GDP

0%2%4%6%8%

10%12%14%16%18%

1981

1987

1993

1999

2005

Sh

are

of

GD

P Bolivia

ElSalvador

Source: World Bank World Development Indicators

During the 1980s many

Salvadorans migrated

illegally to the United

States to escape violence

and war. Once there, they

laid down their roots and

many had children who

became U.S. citizens. In

September 1990, the United States Government made El Salvador the first country to be

granted Temporary Protection Status (TPS) – allowing 220,000 Salvadoran immigrants

already in the U.S. to work legally. This status has been frequently extended, most

recently until March 2009. This amnesty has helped Salvadorans to represent the third

largest population (605,850) of foreign nationals in the United States after Mexicans and

Indians (OECD 2005). This is in addition to 219,745 naturalized immigrants to the U.S.

from El Salvador.

But El Salvador is not the only Latin American country to benefit from a extraordinary

migration status. In 1999 Honduras and Nicaragua were designated for TPS due to the

devastation resulting from Hurricane Mitch. Approximately 100,000 Hondurans and

6,000 Nicaraguans received the status which continues to be renewed at the request of the

Honduran and Nicaraguan governments. These countries plus El Salvador are three of the

only seven countries whose nationals currently have Temporary Protection Status.

Figure 4. Visa Issuance Legal Immigration to the US is much higher for

Salvadorans

0

2000

4000

6000

8000

10000

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006U

S N

umbe

r of I

mm

igra

nt V

isas

Is

sued

Bolivia

ElSalvador

Source: US Department of State 2007.

Bolivian immigrants on the other hand are far less numerous than Salvadorans. Most that

do leave the country venture for agricultural and service jobs in Argentina. Trekkers to

the United States must overcome significant travel or visa costs so that they are much less

likely to be illegal immigrants and more likely to be better educated and from wealthier

families. Table 1 shows some characteristics of the migrant stocks from El Salvador and

Bolivia despite similar poverty levels in each country.

Table 1. Poverty is Mutual but Migration is Salvadoran Bolivia El Salvador Stock of Emigrants (2005) 4.6% 16.4% Tertiary Education Emigration (2000) 6% 31.5% Poverty Rate at National Poverty Line (2004) 23.9% 20.4% Primary Destinations of Emigrants Argentina

USSpain

US Canada

Guatemala Source: World Bank Migration and Remittances Factbook (2008)

The 2007 statistics on U.S. immigrant visas show how important a stock of existing

migrants is to continuing migration. Almost all legal Salvadoran immigrants to the U.S.

are eligible for visas because they have immediate relatives already in the U.S. or have

family preference. This holds true for many countries as shown in Table 2.

Table 2. U.S. Immigrant Visa Statistics 2007 Foreign State Immediate

Relatives Family

Preference Employment Preference

Diversity Immigrants

Total

South America Bolivia 680 155 82 90 1,008 Colombia 3,832 2,100 205 0 6,153 Ecuador 2,774 2,033 1,025 70 5,930

Central America and the Caribbean El Salvador 3,277 2,949 170 0 6,397 Guatemala 6,671 1,419 137 13 8,240 Honduras 2,233 1,382 127 2 3,749 Nicaragua 1,086 743 9 8 1,849 Dominican Republic 6,311 11,889 46 0 18,267 Haiti 10,225 7,453 20 0 17,698 Jamaica 4,496 4,079 103 0 8,732 Worldwide Grand Totals 224,187 139,753 15,706 44,349 448,969

Not all numbers may total due to omitted categories Source: U.S. Department of State

Previous studies have found that the impact of remittances on poverty and inequality

varies. In one, Martínez and Támola (2007) draw their data from a 2004 national

household survey of Honduras and look at observable income, non-remittance income,

and counterfactual income. The first measure includes all forms of income and the second

measure is the same, less remittance receipts. However, the third is an appealing

alternative to non-remittance income because it calculates the counterfactual scenario

where migrants did not migrate. Instead of counting their income as zero, as is the case in

non-remittance income, the authors impute incomes for the migrants based upon

characteristic survey data. These three measures are then compared across poverty lines

and Gini coefficients as shown in Table 3. The authors find that among all households the

remittances appear to reduce poverty and have an ambiguous effect on inequality.

Table 3. Effects of Remittances on Poverty and Inequality in Honduras All households Recipient households Observed Non-remittance

income Counterfactual Observed Non-

remittance income

Counterfactual

Poverty headcount ratio

70.9 73.6 72 49.2 67.6 60

Gini 61.5 62.1 60.7 52.5 59.4 52.9

Source: Martínez & Támola (2007)

Hence there can be mixed effects among poverty and inequality depending on the sample

and whether a counterfactual scenario is computed. Overall, the data suggest that

remittances are more likely to be received by poor households and that remittances then

have a poverty reducing effect.

Another recent study by Adams (2006) finds that remittances in Guatemala significantly

reduce the poverty rate from 50 percent to 47.7 percent. This paper also uses

counterfactual imputation as the comparison scenario to the observed data. It finds that

poverty rates are similar between households receiving remittances and those that do not.

In addition to reducing poverty the study also found that remittances ameliorated the

depth and severity of poverty for those poor that were unable to surpass the national

poverty line.

Finally, Acosta et al. (2006b) look at remittances, poverty, and inequality across ten

different countries. However, their remittance estimates are drawn from estimates by the

International Monetary Fund that use balance of payment statistics from national

accounts. These are less accurate than household surveys to estimate remittance flows

(cite). Also using a counterfactual scenario, they find different results in both Guatemala

and Honduras using the same data sets as Martínez and Támola (2007) and Adams (2006).

In Honduras Acosta et al. (2006b) find that inequality decreases by 1.1 percent from 56.5

to 55.9 – about half the change found when comparing observed income with non-

remittance income (2.3%). This is in contrast with the findings by Martínez and Támola

(2007) who calculated a 1.3 percent increase in income inequality. In Guatemala, Acosta

et al. (2006b) find that inequality decreases by 2.9 percent, more than calculated in the

non-remittance income scenario (-1.8%).

For poverty, Acosta et al. (2006b) measure poverty at US$2 (PPP) per day which is a

slightly different base than the national poverty lines used in Martínez and Támola (2007)

and Adams (2006) but they still find results with their national account data that differ

from the household survey results. In Honduras they find that poverty decreases by about

0.6 percent compared to the 1.5 percent found by Martínez and Támola (2007). In

contrast, Acosta et al. (2006b) find the same decrease in poverty of 1.7 percent as Adams

(2006) had for Guatemala.

While most countries exhibit the expected results in Acosta et al. (2006b), it is

worthwhile to note that not all countries’ data conformed to the expectation of reduced

poverty and inequality after including remittance income and that the counterfactual

scenario reduces the magnitude of this effect. In the next section, household survey

findings will be presented for El Salvador and Bolivia.

Data

Remittance data collection and measurement have long been challenges for governments

and researchers. Information on remittance flows can be estimated using one of several

methods. Official balance of payment (BOP) statistics are used by many governments

and researchers. This data has the benefit of being the most readily available estimate of

remittances across countries and time but fails to capture informal flows and has

significant margins of error (cite).

Household surveys are another method of estimating remittances. These can be incredibly

detailed – both providing more information and making analysis more complex. Surveys

are also more expensive to implement than BOP statistics so that the availability of

survey remittance data is inconsistent and sparse across countries and time. However,

where available, surveys provide superior detail to BOP statistics.

This paper simulates this analysis for El Salvador and Bolivia to confirm that remittances

can help reduce poverty and inequality but may not have this effect in all countries. Data

was obtained from national household surveys conducted in 2002 in each country. In El

Salvador this was conducted by the Ministry of the Economy and in Bolivia by the

National Statistics Institute.

Findings in El Salvador

In El Salvador remittances are expected to reduce both poverty and inequality. The IMF

World Economic Outlook (April 2008) reports El Salvador as having been the 8th poorest

country in the Western Hemisphere by GDP per capita (PPP$4,761) in 2002. The survey

data revealed the annual income per capita to be USD$1,238. El Salvador also has one of

the highest ratios of remittance receipts: 23 percent of the population lived in a household

reporting receiving international remittances. Of those receiving remittances, the average

received was USD$724 per person annually. Although the magnitude of remittances is

certainly significant in El Salvador, their effect on poverty and inequality depends

crucially on their incidence.

As expected, remittances were found to be unevenly distributed across income quintiles:

the top two quintiles received about two-thirds of all remittances to the country.

Remittances accounted for between 10 and 20 percent of total income for all quintiles –

15.6 percent for the bottom quintile and 18.8 percent of all income for those in the middle

quintile. This pattern suggests that the incidence of remittances is only somewhat more

equal than the existing income distribution.

Looking at relative poverty the data reveal that the top quintile decreases its share of

national income by about 2 percent and that the bottom 40 percent of income earners

increase their share of income by 0.5 percent. The greatest gains go to the third and fourth

quintiles which increase their income share by 1.5 percent. The impacts reduce inequality

by about 3.4 percent as the Gini coefficient decreases to 49 from 50.7 when remittance

income is factored into total income. Figure 5 shows the change in the distribution of

income omitting remittance receipts (before) and with their inclusion (after).

Figure 5. Distribution of Income in El Salvador Before and After Remittances

Source: 2002 MECOVI

Comparing poverty rates before and after the inclusion of remittance income, absolute

poverty (at the national poverty line) appears to decline by about 10 percent. However,

this is without the support of a counterfactual scenario so that the true effect is likely

smaller as in the case of Honduras considered by Martínez and Támalo (2007).

Findings in Bolivia

The same calculations are repeated for Bolivia to show that remittances have a much

smaller effect, if any, on countries without access to a wealthy country as a remittance

source. Indeed, the survey data bear out expectations.

Bolivia was the fifth poorest country in the western hemisphere by GDP per capita

(USD$3,220) in 2002. The average annual income per capita in Bolivia was found to be

USD$566 and only 3.4 percent of the population lived in households reporting remittance

receipts. Most of those that did receive remittances reported receiving them monthly with

an annual average of USD$248 per capita annually.

However, the top two income quintiles receive over 90 percent of all remittances to the

country and remittances account for less than 2 percent of total income for each quintile.

We know for a fact that Bolivia has a much smaller remittance flow than many other

Latin American countries however this finding also suggests that remittances do not

alleviate poverty or decrease inequality as depicted in Figure 6.

Figure 6. Distribution of Income in Bolivia Before and After Remittances

Source: 2002 ENCOVI

Comparing pre-remittance income to post-remittance income, we find that the change in

relative poverty is insignificant: the total share of income by the top quintile actually

increases by 0.3 percent and the Gini coefficient rises from 56.8 to 57. Similarly, the

poverty headcount ratio at the national poverty line changes only an insignificant 0.27

percent.

The Two Cases in Latin America and the Caribbean

Contrasting El Salvador and Bolivia we find that remittance flows have great variation in

both magnitude and incidence. There are several factors that are likely to be affecting this

difference. First, and obviously, El Salvador benefits from its proximity to the United

States. It was also the first country to receive temporary protection status from the US

government, allowing it a large stock of poor migrants whom had migrated illegally to

become legal workers. And so benefiting from these facts of geography and history, El

Salvador receives greater levels of remittances than Bolivia.

Bolivia has had no comparable diaspora to El Salvador and other Central American

neighbors that have suffered from civil war and natural disaster. Such extreme

circumstances have provided migrants, rich and poor, from countries such as Haiti,

Dominican Republic, Honduras, Guatemala and others with amnesty that has resulted in a

remittance incidence that is decreases both poverty and inequality. Yet even in this

scenario, optimal for pro-poor capital flows, the effects appear to be only mild. And so in

the case of Bolivia, where access to the US and EU are limited to the educated or wealthy,

remittance flows are also growing in magnitude but have very little impact on the poor

and actually increase inequality overall.

Policy Implications

The field of study on remittances has been growing rapidly and improving its data efforts

but data is still sparse. Efforts will need to continue to integrate remittance data collection

into national surveys around the world. This will help to explore the impacts of

remittances which the surveys from El Salvador and Bolivia, exhibited in this paper,

show are not the same across all countries.

As the data improves and the field of literature grows, development and financial sector

policymakers and practitioners will become more sophisticated in their remittance

programming. This paper suggests at least a simple categorization of developing

countries into “El Salvadors” and “Bolivias” to help refine policy choices to leverage

remittances for economic and financial development.

The Bolivias are mostly South American countries that represent only a small percentage

of remittances to Latin America such as Suriname, Ecuador and Peru. The flows to these

countries are often even more unequal as the income distribution before remittances

(Fajnzylber and López 2007). The findings from this paper, combined with much other

literature in the field, suggests that remittance-related policy changes would have little

effect on poverty or inequality in countries where migration and access to the United

States or EU is limited. Until migration policies welcome poor, low-skilled workers from

these countries, remittance flows in these corridors will continue to be dominated by the

top quintile of income earners.

The Salvadoran case is broadly representative of Central America and the Caribbean.

These countries, including inter alia, Guatemala, Nicaragua, Honduras, Haiti, Jamaica

and Mexico, comprise the most unequal region in the world and generally have

populations with low levels of education so that their migrants are often poor. The

countries in this category also tend to have experienced crises and often as a result, have

large migrant populations. Together this means that many of the remittance corridors to

these countries are pro-poor and significant in value on a per capita basis. Interested

institutions can and should engage to encourage the use of these private capital flows for

economic and financial development.

Policy Recommendations

The findings of this paper and review of the literature yield many implications for

governmental and multilateral institutions including ministries of finance and central

banks and specifically, because the United States is the largest sender of remittances, the

Department of the Treasury and Federal Reserve. All of the G8 countries also committed

to improving remittance flows at their Sea Island summit in 2004 where they declared an

action plan to:

• Facilitate formal financial transactions including financial literacy programs

and cooperation with the private sector;

• Reduce the cost of remittance services through promotion, innovation and

access;

• Encourage cooperation between remittance service providers and local

financial institutions to strengthen markets and access;

• Encourage local development funds to enhance options for productively

investing remittance receipts; and

• Support dialogue across the public, NGO and private sectors towards these

goals.

Each action point is an important element to improving global remittance flows. Not only

will their fulfillment assist migrants and their families but also help the G8 countries meet

their goals of strengthening anti-money laundering and combating the financing of

terrorism (AML-CFT) regulations; promoting financial access, growth and development

in developing countries; and securing the stability of the international financial system.

There are several policies that governments and institutions can adopt and actions they

can take to enhance the impact of remittances in El Salvador and countries like it.

1. Continue to support efforts to improve data collection. This requires

building domestic survey capacity Salvador and financially supporting national

statistics offices in El Salvador and Central American countries, both directly and

through multilateral institutions. Data collection will be further facilitated and

data quality improved if formal remittance flows grow relative to informal flows.

2. Increase the use of formal remittance mechanisms. Doing so would

have significant positive externalities including the improvement of international

security by making legitimate informal remittances, which currently go

unrecorded, monitored for AML/CFT purposes. This would help authorities in

sending and receiving countries to monitor international capital flows for

suspicious activity. It would assist institutions such as the IMF to better

understand the effects of remittances on macroeconomic stability. Increasing the

prevalence of formal remittance mechanisms is also likely to improve financial

access for both remittance senders and recipients. Lowering transactions costs and

strengthening Spanish financial literacy courses will help to make formal

mechanisms more attractive to Latin American immigrants in host countries.

3. Support efforts to decrease transactions costs of formal mechanisms.

Cost is an important determinant of remittance flows and the likelihood to

transmit informally. Beginning with Central American and Caribbean countries,

regulators can support fair prices by adopting transparency measures developed

by the Committee on Payment and Settlement Systems to clearly disclose

transaction information. Specifically this includes the total amount paid, the

amount disbursed, total fees and taxes, and the time and location of pickup

availability. Regulators should also discourage exclusive partnerships between

home and host country operators so as to improve competition and prevent

monopoly rents on transaction costs. Lower transactions costs have been found to

be associated with greater number of service providers, larger transaction sizes

and larger annual remittances volumes (Orozco 2006).

4. Reassure commercial banks in their dealings with immigrants of non-

regularized status. It is estimated that only 50 percent of Latin Americans in the

United States have bank accounts (Orozco 2004). Even though U.S. banks are

permitted to serve migrants that “have identity cards that comply with the

minimum requirement at their [the banks] discretion” banks are currently

reluctant to provide financial services for low-income migrants. Doing so could

expose them to risks that government will find negligence in their responsibility

to know their customers. Focusing on countries like El Salvador, host country

governments and multilateral institutions should continue to work with foreign

embassies to develop consular identification card programs like those that have

been successful for Mexican and Guatemalan migrants. The lack of banks and

bank accounts has a host of negative implications, from higher transmitting costs

for remittances to lack of credit for home ownership to lower investment in

productive enterprises – both at home and abroad.

5. Provide incentives for banks and remittance recipients to develop

relationships in the home country. In El Salvador it is estimated that almost 85

percent of all remittances are transmitted by banks. The country also has one of

the largest and most advanced financial sectors in the region, yet not unlike other

developing countries the majority remittance recipients function entirely in the

cash and barter segment of the economy. This inhibits economic growth and

financial development. Aggarwal, et al. (2006) find strong support for the theory

that remittances promote financial development. In most countries of the El

Salvador type there is significant need to increase both banks’ remittances and

account services as shown in Figure 10. Having access to financing will help to

promote productive investments in developing countries.

Figure 10. Domestic Banking Sector in Remittances and Deposit Accounts

Source: Orozco (2007)

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